Why back-to-school sales tax holidays could actually cost you money

Wealthy people like Soleil Moon Frye may actually benefit more from back-to-school sales tax holidays than lower income families.

By

JacobPassy

In coming weeks, shoppers across the country will flock to retailers to take advantage of back-to-school sales tax “holidays.” But whether these temporary tax breaks are the best way to help consumers save is a matter of debate.

Back-to-school sales tax holidays are periods of time when state and local governments do not collect sales tax on a range of items children may need for school, such as clothing, school supplies, backpacks and computers. What’s included in the sales tax holiday varies from state to state, and there is usually a limit on the price of items that are eligible.

Currently 16 states have back-to-school sales tax holidays planned for 2017, with most located in the Southeast. Some states also have sales tax holidays for other products, such as guns and hunting supplies, energy-efficient appliances and hurricane preparedness items.

“Sales tax holidays may provide some taxpayers savings on necessary purchases, but they’re a distraction from the bigger problems of our states’ upside-down tax systems,” said Meg Wiehe, deputy director at the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C.-based nonprofit, non-partisan think tank that recently released a report on tax holidays.

State and local governments lose revenue from temporary tax holidays, and that loss eventually translates into cuts to public programs or higher taxes elsewhere, ITEP’s report said. And ultimately, someone has to foot the bill for the holidays. It estimates that in 2017 sales tax holidays will cost governments in the 16 states holding them more than $250 million.

That expense is why lawmakers in many states have scaled these events back or decided against holding them in recent years. Florida’s sales tax holiday used to last 10 days, but is now only three days long. Lawmakers in Massachusetts also appear poised to forego the event this year, due to budget shortfalls, and Georgia and North Carolina have eliminated their back-to-school sales tax holidays recently.

Meanwhile, attempts at creating sales tax holidays in other states such as Wisconsin and Nebraska have failed. (On the flip side, New York chose to make its sales tax exemption on clothing and footwear purchases under $110 permanent.)

Instead of these holidays, Wiehe said state governments would serve their residents better by canceling these tax holidays in favor of overall tax reform. For instance, North Carolina lawmakers decided to end the state’s tax holiday as part of a broader tax reform bill.

“You could be more targeted and effective in delivering [tax relief],” said Joe Henchman, executive vice president of the Tax Foundation, a nonprofit think tank based in Washington, D.C. that says its goal is to improve people’s lives through tax policy. “Having twice as much of your income be tax-free is more meaningful to a low-income person than taking off the sales tax one weekend a year.”

That said, some consumers benefit from tax holidays. “Saving 5% is not going to have much impact on a wealthy family, but if you’re a low-income family that’s struggling to buy school supplies and new clothes for the fall, it can help a lot,” said Craig Shearman, vice president for government affairs and public relations at the National Retail Federation, a trade group that represents retailers.

But if shoppers are tempted to buy items not eligible for the tax exemption aren’t careful, they could be negating the savings they’ve accrued. “You can save money — it’s very difficult to do so, though,” Henchman said.

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